Solvency Management and Financial Sustainability of Supermarkets in Kenya

Conceptual Framework

Financial Leverage o Total Debts o Equity Value o Debt-Equity Ratio o Debt to total Capital Ratio o Interest Coverage Ratio

Operating Margins o Operating Income o Total Sales Revenue o Operating Costs

Financial Sustainability o Operating cash flows to average total liabilities ratio o Net working capital to total assets ratio o Owner’s equity to long-term debt

Firm Size o Total assets o Market Capitalization o Total Sales

Independent Variables

5.2 Review of Study Variables

Dependent Variable

The constructs of solvency management; financial leverage, operating margins and firm size and financial sustainability have been discussed in this section.

Financial Leverage

Financial leverage entails the utilization of debt funds, along with the organization’s equity (Batchimeg, 2017). Financial leverage has been a constant element of concern in the corporate world, particula rly in the whole sale and retail industry. The development and advancement of financial markets has led to increase in the organization’s funding opportunities, which are critical for performance optimization. Debt and equity funds are major categories of financing options available to the companies (Kinuthia, 2015). Financial leverage is always applied on the basis of the company’s equity and involves the use of debt financial instruments comprising bank loans, bonds, and debentures. Corporate entities ought to decide the appropriate proportion of debt funds and strike the right balance that can reduce cost and increase earnings and enhance financial sustainability (Navarro-Sarrión, 2016).

Debt funds have a significant link to supermarkets’ solvency management (Batchimeg, 2017). Supermarkets acquire debts for fund stocking, investments, and operational expansions. Therefore, financial leverage is an important aspect of solvency management and financial management at large. Financial leverage is intended to streamline business processes, facilitate the acquisition of assets, increase returns, and promote effective financial sustainability in supermarkets (Navarro-Sarrión, 2016). It offers a mechanism of increasing overall and net returns by funding some business activities through loans or other financial debt securities. Financial leverage is indicated by the value of debts, debt ratio, debt to total capital ratio, and the interest coverage ratio.

Financial leverage comes with financing costs that supermarkets are obligated to meet (Jati, 2019). They are obligated to pay interests on debts, and failure to make such payments leads to insolvency. Effective solvency management ensures that a company obtains debts, whose costs can be settled without financial constraints. The supermarkets’ solvency is a crucial indicator of financial sustainability and is measured by the interest coverage ratio. The interest coverage ratio measures the supermarket's safety of margin for pay interests on